RIMM Remains in Motion

11/11/2008 1:30 pm EST


Nikhil Hutheesing, editor of Forbes Wireless Stock Watch, says Research in Motion has a lot going for it despite the economy and growing competition.

Research In Motion (Nasdaq: RIMM), best known for its BlackBerry wireless device, makes money mostly by sales of its handheld devices and server software, which integrates corporate email systems with its handhelds. In fiscal 2008 (which ended in February), the company sold nearly 14 million devices for an average selling price of $346 each. Those sales generated about 79% of its revenue.

Investors doubt whether RIMM can repeat the 90% growth in revenues that it achieved in fiscal 2008. Not only is the slowing economy a threat to growth, but so is increased competition. Apple's (Nasdaq: AAPL) iPhone, for example, has been a hit among consumers and now the company is pushing into the corporate market, trying to erode RIMM's market share. And Google (Nasdaq: GOOG) just released its smart phone, the G1.

But the BlackBerry has a 54% market share among companies, and it has become central to the way companies communicate and do business. So, I don't expect the slowing economy to hit RIMM as much it might hurt sales of simple cell phones, for instance.

[And] for Apple to erode RIMM's market share in the workplace, companies need to get Apple's iPhones in the hands of their employees and to buy the iPhone software and integrate it into their own networks. Since RIMM already commands this market and many companies are now slowing their spending, it seems likely that, for now, they will be satisfied with RIMM.

[Meanwhile], RIMM's got a new line of [consumer] smart phones: the Blackberry Pearl Flip 8220, the BlackBerry Bold 9000, and the BlackBerry Storm—a touchscreen phone. [In its second fiscal quarter,] RIMM shipped 6.1 million BlackBerry devices and added 2.6 million new subscribers, bringing its subscriber base to 19 million. About 60% of those new subscribers were consumers—not companies. RIMM now says that it expects to add approximately 2.9 million accounts in the third quarter of fiscal year 2009.

Shares of RIMM have fallen 58% this year to $47.Yet in its second fiscal quarter, net income jumped 72%. Earnings [in the third fiscal quarter] should come in at about 93 cents per share. The company has $2.24 billion in cash and no long-term debt. Its [stock] trades at just 20x fiscal 2009 expected earnings, down sharply from 30x recently. RIMM's price/earnings-to-growth (PEG) ratio is just 0.35.

It's likely that growth in RIMM's earnings per share will slow in fiscal 2010—which begins in February—because the company has been increasing its [research and development spending]. But I believe that RIMM will generate above-average earnings growth of 25% over the next three years, as demand for its smart phones increases. At the current price, I think much of the risk has been built in—but the earnings growth has not.

As a result, I recommend purchase of shares of RIMM at current levels. I expect earnings per share of $4.50 for fiscal 2010. I'm using 20x earnings, which I believe is rather conservative, to reach my target price of $90 per share.
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